Selling Rental: Passive loss and depreciation

[jumboshrimp1]

I am selling my rental unit, hoping for $235K, bought it for $212K, and have $130K left on my mortgage. Assuming we pay $25K in transfer taxes/realtor fees/staging, etc. we'd walk with $80K.

What will my taxes look like?

How will depreciation impact our "take home"? We've depreciated $48K since 2018.  Is this "added" to the "profit" we'd earned from the sale ($23K)?

What constitutes a capital investment? We remodeled the kitchen and bathroom 10 years ago when we lived there (been renting for 6 years now) but I don't think ever included that in our tax documentation. Is it too late to declare those as capital investments?

We also have been operating at a loss, our declared unallowed passive losses total $48,294 over the past 5 years. Where do these loses get applied in my taxes? To reduce my taxable income?

Thank you!!!!

[DianeW777]

The taxes will reflect depreciation gain taxed at a maximum of 25%, even if your tax bracket it higher.  At a rough calculation based on your figures I see a $46,000 gain, without any capital improvements.  TurboTax will calculate your gain when you sell and it will be handled in the rental activity assets and it's not too late to add your capital improvements (see below).

You will allocate the selling price to building, other assets and land by using a proration of cost of each to total cost of all assets. 

The passive activity loss (PAL) will be used up in the year the property is sold, and will allow the offset to any other income you might have at that time.

When you placed your property in service as a rental activity, you should have included the capital improvements at the time and added that to your original cost basis.  When a property is converted from personal to rental use the amount you can uses as a cost basis is the lower of actual cost or fair market value (FMV) on the date it was converted.  

If you did not use the capital improvements (kitchen and bathroom remodel) on the conversion date as part of your property cost, and the cost in total was lower than FMV, you can add that as a separate asset now.  This will allow current depreciation to be used in 2023.  Depreciation under tax law is allowed or allowable so that essentially means use it or lose it.  

There is a Form that would allow you to capture as an expense any depreciation you did not claim by mistake before 2023 (too late to amend from the beginning of the rental period).  Form 3115 is somewhat complicated, but can be used in TurboTax Desktop. You could have a tax professional prepare this form for you to be used in 2024 when your property is sold, and file it with that tax return.

See the following for the types of purchase and sales expenses can be used to add to the cost basis or in the year of sale reduce the selling price.

Do not use any mortgage interest, real estate or school taxes, local or city taxes.  Transfer tax is a separate and identifiable expense of purchasing a property.

• See IRS Publication 551 (pages 2 & 3)

Loan charges - Loan charges are part of the loan and not added to cost basis

• Application fees
• Lender fees
• Appraisal Fee
• Inspection Fee
• Condo Questionnaire
• Credit Report
• Debt Report

You can't include in your basis the fees and costs for getting a loan on property.

Government Recording and Transfer Charges- these are added to the cost basis of the property

• Recording fees
• Title Charges
• Lenders Tile Policy
• Settlement or Closing Fee
• MLC  - Assuming it means Municipal Lean Certificate
• Title Exam
• Owners title Insurance

You can include these closing costs and add them to the cost basis of the property as noted above.